Beginner Investing Tools

Let's look at what types of funds to invest in. We know that we want to invest in stocks (for the high return) and bonds (for the stability).

We could invest in individual stocks, stock mutual funds, or stock index funds. The same goes for bonds. As minimalists, we want to invest in index funds.

By investing in index funds, instead of trying to "beat" the stock market, we join it. We spend no time researching and picking stocks to invest in. Our return matches the return of the overall stock market.

A stock index is a listing of the largest companies in a stock market, ranked by market capitalization. The most well known index is the S&P 500, a listing of the 500 largest stocks on the New York Stock Exchange.

These 500 companies account for about 75-80% of all US common stocks.

An index fund is a grouping of stocks that follows one of the indexes (such as the S&P 500). They invest in stocks proportional to the amount of each company's stock in the market.

So an index fund would have more of GE's stock than, say, Apple's. If you were to invest in an S&P 500 fund, you would own a little stock of all 500 of the largest companies in the US market.


How much in stocks vs. bonds?

To answer this question, I turn to Jack Bogle, investment legend and founder of Vanguard. A simple rule of thumb he suggests is to have your age as your percentage in bonds.

So, a 25 year old, following his advice, would invest 25% in bonds and 75% in stocks. Each year the investor would increase the amount invested in bonds by 1% and lower the amount invested in stocks by 1%. Simple and effective.

Damien Olenslager loves big ideas. bitesizeidea.com is my attempt to spread bite size ideas to the world. I want normal people like you and me to understand how to live happier, healthier, financially secure lives.

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